Download No Taxation without Representation

“No Taxation without Representation”
by Milton Friedman
Newsweek, 3 March 1969, p. 76
©The Newsweek/Daily Beast Company LLC
Congress has not legislated a reduction in the personal exemption under the income tax since
1942. Yet the exemption today is only about half of what it was then. How come? In dollars, the
exemption was reduced to $500 per person in 1942. It is now $600. But a dollar is not a dollar is
not a dollar. Today, a dollar will buy less than half as much as a dollar would buy in 1942.
Rising prices have cut nearly in half the real value of the income-tax exemption.
Inflation is not ordinarily considered to be a tax. And yet that is what it is. It is a tax twice over.
It is, first, a tax on income because it lowers the real value of personal exemptions, and raises the
rate applied to our incomes by pushing us into higher tax brackets. As a result, taxes go up faster
than prices, which means that the government collects more in real terms.
Second, inflation is a tax on cash balances. When prices rise, all of us must add to the number of
dollars we hold in order to keep the purchasing power of our cash balances constant. To get these
extra dollars, we must give up some real resources, in the form of labor or of the goods we could
have purchased instead—just as we must in order to get the dollars that we pay in explicit taxes.
To whom do we give up the real resources? To the government from whom we get the extra
dollars it prints or makes available indirectly through deposits at the Federal Reserve System;
and to the banks that create book entries labeled “deposits” over and above the amount they hold
as currency or as deposits at the Federal Reserve. The total of these extra dollars is the revenue
from the tax on cash balances, a revenue that, under our system, is shared between government
and the banks.
The special feature of inflation as a tax is that it is the only tax that can be levied without specific
Congressional authorization. It can be and is levied by the U.S. Treasury and the Federal Reserve
System on their own say-so, without announcement and without public hearings. That is what
has made inflation such a tempting recourse to governments in need of funds. That is why
countries that have had their ability to levy and collect explicit taxes destroyed or seriously
impaired by defeat in war or by domestic disruption—and only such countries—have
experienced hyperinflation that essentially wiped out the value of their money.
What can we do to end such taxation without representation?
We can end taxation of cash balances without representation by adopting a Congressional rule to
limit the power of the monetary authorities. That is one reason why I have long favored a
Congressional rule specifying that the money supply should be increased by a fixed percentage
year in and year out. However, the main reason I favor this rule is different—to promote
economic stability.
We can end the taxation of income without representation by legislating in advance that the
exemptions, the maximum standard deductions, and the tax brackets under the personal income
tax shall be adjusted each year for the change in the price level.
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For example, start with the 1968 dollar exemptions, maximum deductions and tax brackets. As a
measure of price change, use the BLS cost-of-living index number. Suppose that, by this index,
prices turn out to average 4 per cent higher in 1969 than in 1968. The personal exemption for
1969 would then be 104 per cent of the personal exemption for 1968 or $624 per person instead
of $600. The maximum standard deduction for a single person would be $312 instead of $300.
The first bracket rate of 14 per cent would apply to the first $520 for a single person instead of to
the first $500, and so on down the line.
This simple and thoroughly practicable reform will not begin to solve all the defects of the
income tax. But it will prevent a creeping and automatic increase in the rate of taxation as a
result of inflation. It will not prevent Congress from raising or lowering income-tax rates but it
will require Congress to do so openly and by explicit action.
The hearings on tax reform that are now being held will be lengthy, complex, and to judge from
experience, unproductive. Here is a simple reform that requires no lengthy hearings, no extensive
consideration of technical tax provisions, no attack on long-established vested interests.
Will anyone who can find any objection to enacting it at once please step forth?
Reprinted in: (1) Milton Friedman, An Economist’s Protest: Columns on Political Economy, pp.
81-82. Glen Ridge, New Jersey: Thomas Horton & Daughters, 1972. (2) Milton Friedman,
There’s No Such Thing as a Free Lunch, pp. 144-145. LaSalle, Illinois: Open Court Publishing
Company, 1975.
Compiled by Robert Leeson and Charles Palm as part of their “Collected Works of Milton
Friedman” project.
Reformatted for the Web.
10/25/12
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